This is a companion piece to Tuesday's
Love the Gold post, focusing on gold's role when people lose trust in money.
Izabella Kaminska is journalist/blogger I follow at FT Alphaville and her personal blog because she is an original thinker and hates gold (I'm not interested in gold haters with clichéd thoughts). Her work is demanding often because she is several steps ahead and I'm scrambling to catch up, often it is because she makes logic jumps that are evident in her mind but could do with more exposition, but sometimes she is just wrong.
This post from August on one of her favourite topics, money, is an example of all three. I just want to focus on the trust issue. Izabella notes that there is a whole range of monies (eg central bank base money, bank issued money, shadow banking) which for most of the time everyone treats equally. All these monies are thus mixed up or entangled. Problems happen when "a corrupted money type has been entangled amongst the remaining virtuous stock in the system" and "the more entangled it is, the greater the flight of capital to a clearly definable and unentangled money type in response".
So when people "start to question whether other people’s judgments about what is truly meaningful or not were correct at all" and where there is not "enough surplus stuff in the economy to ensure that money retains its purchasing power" to what clearly definable and unentangled money does capital fly? Not gold according to Izabella, as this "carries too much risk" nor anything else except the monies of :
- someone who everyone trusts, and who everyone knows adds value (like a respected government)
- someone who you know has something you need, and thus someone you can be sure has already added value (a collateralised money)
- someone you can be sure will allocate the things you give him so wisely that there will be more of the stuff you value (like a reputable interest-paying investment institution)
The situation Izabella doesn't consider, and what I'm interested in, is to what does capital fly when:
- people lose trust/respect in government because it is issuing money well beyond the meagre value it adds (or its bureaucratic inefficiency + stupidity result in net negative value)
- Minskian ponzi borrower dynamics means that collateralised money is overvalued
- a combination of point 2, lax regulation and skewed incentives mean banks unwisely create/lend money
Izabella gets to the answer when she notes that
"it's worth remembering that ancient cultures tended mostly to use gold for trade with strangers they did not trust", although she thinks it is debatable whether
"gold counts as virtuous money stock". I would concede that when people begin to distrust monies #2 or #3, most will run to #1.
However, consider Izabella's point in this post that "today’s modern cities are ... huge hubs dedicated to information gathering and stand-alone consumption. But they also happen to be society’s most vulnerable pressure points, due to their dependence on supply chains". We live in a massively complex system, which, when its "distribution channels (the nervous system) have become clogged whether that’s due to natural disaster, famine, war, disease or corruption (over consumption by the few)" inflation is the result.
When money loses its purchasing power, Izabella notes that "well being and richness is ultimately determined by physical coercion, intimidation tactics, cartel-like organisation or self-sufficiency." And the group of people in the best power position to protect their well being and richness with oppressive tactics? Government and its bureaucracies. That's when people will run from money #1 to gold.
